BS Jury

Successive repo rate cuts by the Reserve Bank of India (RBI) have not been effective in containing inflation, and the Cash Reserve Ratio (CRR) is a "waste" for the economy. On Tuesday's inflation is cost push and not demand-pull. Trying to address that with higher interest rates might not be very effective. Being an incurable optimist, I had expected a 50 bps repo cut. But, anyway, CRR has been cut by 25 basis points and the RBI governor had his own reasons and his own compulsions to see inflation down. There is a need do away with CRR, the amount of deposits that lenders must keep with the central bank. Our bank, it’s for ALCO (asset liability committee) to take a view. But we would prefer a more secular rate cut with the adjustment in the base rate because we have almost (done) rebalancing of the portfolio... But it is for ALCO to take a final view.

Keki Mistry
Vice-chairman & CEO, HDFC

The Reserve Bank of India's announcement to reduce the Cash Reserve Ratio by 25 basis points to 4.25 per cent was largely on expected lines. This measure was required, given that liquidity conditions were tightening, coupled with the seasonal increase in credit. RBI anticipates that inflation will increase in the third quarter of the current financial year and then ease in the fourth one. It has, thus, increased its baseline projection of inflation to 7.5 per cent for March 2013. The recent fall in the rupee from Rs 51.5 to Rs 54 a dollar will aggravate inflation, predominantly due to higher costs on oil imports. A stronger rupee will help ease inflationary pressures, in turn giving RBI elbow room to reduce interest rates. I do believe that unless we again head to a major global crisis-like situation or there is a very sharp spurt in oil prices, we should see lower interest rates in India in the coming months.

Nirmal Jain
Founder & Chairman, India Infoline

A few weeks ago, the government surprised everybody with a substantial hike in diesel price, limiting subsidised cooking gas, and allowing FDI in multi-brand retail. The surprise worked like magic to improve the markets’ and investors’ sentiments. While inflation is an issue, a repo rate cut would have been a similar magic to turn around sentiments radically, for investment in new projects, expansion and for capital flow. It could have done little incremental damage to inflation or inflationary expectations. In on Tuesday’s context, I would think if one has to choose between the two evils of inflation and low growth, the former is the lesser one. Paradoxically, we need growth to address inflation in the long term. A growing economy like ours needs a conducive environment for investment and capital formation, to ease supply constraints. The CRR cut will help liquidity and ease pressure on lending rates. It will nullify the negative impact on increased provisioning on restructured assets.

Chanda Kochhar
Managing Director & CEO, ICICI Bank

RBI has continued with its policy of proactively addressing any possible liquidity issue to ensure liquidity remains within the comfort zone and credit is made available to the productive sectors of the economy. The market would keenly look forward to a policy rate reduction by RBI in the coming months to give an impetus to growth. Immediately, I don't see rates coming down. Interest rates move with the cost of funds. But, over a period of time, there has to be softening in the overall interest rate regime. One should expect the softening of interest rates in this financial year. Deposit rates have been adjusting for some time. If you see wholesale deposit rates, the cost has gone down from the March level. Deposit rate movement will continue keeping in mind two scenarios. The first is the demand for credit and the growth in deposits. The second is how interest rates move across other investment products. Based on the deposits and lending, the rates will move.

Ravneet Gill
CEO, Deutsche Bank, India

On Tuesday's policy decision by the Reserve Bank of India is constructive. While the RBI is encouraged by the government's recent measures, aimed at fiscal consolidation and improving the investment environment, it is waiting to see the progress with respect to structural improvements prior to effecting a rate cut. At the same time, to facilitate the flow of credit to productive sectors, it has cut CRR.

We agree with RBI's assessment that inflation momentum remains strong, even beyond the fuel price adjustment-related rise in prices seen in September. Our tracking of a large number of items shows that during October, the price trend was generally favourable for food and unfavourable for non-food goods. Inflation could ease in the future; however, the evidence or indication of such respite is scant at this juncture. How that landscape evolves shall determine the timing of the first rate cut in this cycle.

Y M Deosthalee
CMD, L&T Finance Holdings Limited

This is the first credit policy by RBI since the Union government announced a few reform measures. The finance minister also recently made some statement on the fiscal consolidation process, reassuring the markets that the government was determined to bring back fiscal discipline. Despite continuous prodding by the government and industry, RBI chose to keep the repo rates unchanged. The central bank has clearly demonstrated its independence and has not succumbed to pressures. It is a clear indication that inflation pressures have not yet abated, leaving little room for RBI to reduce the rates. Global risks have heightened amid a slowdown, and revival in domestic growth hinges on efficient implementation of the reforms announced by the government. However, considering the tight liquidity situation which has emerged over last few days, the banking regulator has cut CRR by 25 basis points. This would release Rs 17,500 crore into the system, which would bring down the liquidity deficit in the range of Rs 50,000-75,000 crore, which appears to be the comfort zone of the RBI.

The RBI has lowered its GDP growth forecast to 5.7 per cent from 6.5 per cent. Given the low level of investment activity in both manufacturing and infrastructure, particularly in power, the RBI may have to bite the bullet sooner rather than later, and take a call to lower interest rates.